Stock's Fat Tails
This from Mebane Faber at a blog called World Beta.
I'm going to post this and it should probably be read in conjunction with what we posted yesterday. In a couple of days when I have a bit more time I'll tie the two together in a post regarding equity exposure and ETFs. I've excerpted parts here and I'll link it right below.
The Capitalism Distribution: Fat Tails in Action
"Quick, before you read this post, ask yourself these questions:
1. What percentage of stocks beat their benchmark index over their lifetime?
2. What percentage of stocks have a negative return over their lifetime?
3. What percentage of stocks lose essentially all of their value?
Not sure? The answers to all three questions are below {"The Capitalism Distribution - The Realities of Individual Common Stock Returns" by Eric Crittenden and Cole Wilcox, BlackStar Funds}
When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. (Some Russell 3000 statistics here.)
Key findings In order to the questions asked above:
1. 39% of stocks had a negative lifetime total return (2 out of every 5 stocks are money losing investments)
2. 18.5% of stocks lost at least 75% of their value (Nearly 1 out of every 5 stocks is a really bad investment)
3. 64% of stocks underperformed the Russell 3000 during their lifetime(Most stocks can’t keep up with a diversified index)
A small minority of stocks significantly outperformed their peers (Capitalism yields a minority of big winners that all have something in common) In this paper we make the case for the Capitalism Distribution, a non‐normal distribution with very fat tails that suggests a small minority of stocks have been responsible for virtually all the market’s gains while most stocks have been below average investments."
Here again is a link to the post. http://worldbeta.blogspot.com/2007/11/capitalism-distribution.html
I'm going to post this and it should probably be read in conjunction with what we posted yesterday. In a couple of days when I have a bit more time I'll tie the two together in a post regarding equity exposure and ETFs. I've excerpted parts here and I'll link it right below.
The Capitalism Distribution: Fat Tails in Action
"Quick, before you read this post, ask yourself these questions:
1. What percentage of stocks beat their benchmark index over their lifetime?
2. What percentage of stocks have a negative return over their lifetime?
3. What percentage of stocks lose essentially all of their value?
Not sure? The answers to all three questions are below {"The Capitalism Distribution - The Realities of Individual Common Stock Returns" by Eric Crittenden and Cole Wilcox, BlackStar Funds}
When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. (Some Russell 3000 statistics here.)
Key findings In order to the questions asked above:
1. 39% of stocks had a negative lifetime total return (2 out of every 5 stocks are money losing investments)
2. 18.5% of stocks lost at least 75% of their value (Nearly 1 out of every 5 stocks is a really bad investment)
3. 64% of stocks underperformed the Russell 3000 during their lifetime(Most stocks can’t keep up with a diversified index)
A small minority of stocks significantly outperformed their peers (Capitalism yields a minority of big winners that all have something in common) In this paper we make the case for the Capitalism Distribution, a non‐normal distribution with very fat tails that suggests a small minority of stocks have been responsible for virtually all the market’s gains while most stocks have been below average investments."
Here again is a link to the post. http://worldbeta.blogspot.com/2007/11/capitalism-distribution.html
posted by CR English at 5:33 AM
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